Most would-be homebuyers these days have no idea where to start when applying for a mortgage. I know I sure didn't. That's because the process has changed so much over the years. At one time, the only option for most homebuyers was to go to their local bank or credit union and take whatever terms they offered. Today, we have myriad mortgage lenders at our fingertips thanks to the internet.
On one hand, the wide array of choices can make picking one much more daunting. On the other, the payoff for shopping around for a mortgage can be significant. I know it was in my case. That's why I wanted to share my experience and provide you with three steps that should make the process much easier the next time you're shopping for a mortgage.
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It pays to shop around
About 50% of homebuyers will only consider one lender when applying for a mortgage, according to a study by NerdWallet. Those folks are costing themselves a lot of money. Borrowers who got just one extra quote saved an average of $1,435 over the life of a typical $250,000 mortgage, according to a study by Freddie Mac. (Note: Freddie calculates the savings in its study using the time value of money, which discounts future dollar amounts to their present-day values -- the actual dollar savings over 30 years would be about three times as much.)
The average savings tended to increase as borrowers got more quotes. Those who made the extra effort to get five quotes would save an average of $2,914 over the course of their loans.
The savings comes from two sources: lower closing costs and better interest rates. While the title costs will stay the same no matter what lender you pick, the origination charges (loan origination, processing, and underwriting fees as well as the cost of the appraisal) can vary by more than $1,000 in many cases.
Likewise, mortgage interest rates do vary between lenders. Freddie Mac found that borrowers who got five quotes were on average able to obtain loans that were a sixth of a percentage point lower than those who only got one offer. While a 0.166 percentage point rate difference might not sound like much, it adds up over a 30-year mortgage.
My mortgage comparison shopping experience
My wife and I found this to be true in our recent home-buying quest. We initially got two mortgage quotes -- one from an online broker and another from our online bank. However, because we live in a particularly competitive housing market, our real estate agent suggested we also get quotes from some local lenders she recommended. That additional effort paid off for us.
The lenders' origination charges (including the appraisal fee) ranged from $1,875 to about $540. (To get that lowest offer, we would have had to open a new checking account with the bank, in return for which it would waive its $995 lender fee.) We ended up opting for a lender with slightly higher total fees ($1,550) because its employees fought hard to win our business, found us a fantastic interest rate (which included a $925 rate credit), and guaranteed they would close the loan by our requested date. For a little extra work, we saved a total of $1,250 up front -- a nice payoff. That's less money we'll need to bring to closing, giving us more that we can spend on some updates to our new home.
Meanwhile, we were offered interest rates between 4% and 3.625% on similar 30-year fixed mortgages. The difference between the top and the bottom of that range, in our case, works out to almost $60 a month on the mortgage payment, or a bit more than $700 a year. These savings will really add up in the coming years. Over the life of our loan, we'll save a whopping $21,250 on total interest (assuming we stay in this home for the entire 30-year term). Add that to the savings we secured on the closing costs, and we're up to more than $22,500 in total savings (or about $8,000 when calculating the present value of those savings).
Mortgage shopping made easy
While shopping around for a mortgage can yield big-time savings, it does require some extra work. That's why I've compiled three simple steps that should make the process much easier:
- Take an "all of the above" approach when considering where to find a mortgage. Inquire at your local bank or credit union, check out an online mortgage comparison site like Lending Tree or Rocket Mortgage, and ask around for recommendations (Your real estate agent should have some good suggestions, as will friends or family members who have recently purchased homes). Also, be sure to check out our picks for the best mortgage lenders.
(A good rule of thumb is to get pre-qualified for a mortgage with at least one lender just before starting your home search. Then, after a seller accepts an offer from you, apply for mortgages with at least five different lenders. If you make all of those applications within a short period of time, credit rating agencies will treat them as a single hard inquiry on your credit report.)
- When you're about to make an offer on a home, ask for a closing cost estimate from each mortgage company. Then compare the loan origination costs from each. (I found laying them all out side by side on an Excel spreadsheet to be very helpful.)
- Leverage those competing offers into an even better one. One mortgage company offered to pay for my appraisal fee, while the bank I went with gave me a lower interest rate and a credit toward closing costs.
You'll be surprised by how much money you can save on a mortgage by shopping around. I know I was.
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